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The Big Squeeze

25 January 2017 by lberuti

It would be fair to say that not much happened since the beginning of the year. Volatility has been very contained. The wider indices (iTraxx Main and iTraxx Crossover in Europe and CDXIG and CDXHY in the US) have traded in narrow ranges, and that transpired in the credit index option market where implied volatilities are remaining rock bottom. Year to date moves are minimal, except for one sub-set: the financial sector. After a brief spell weaker that lasted until the 12th January, the aggressive trend tighter has resumed on iTraxx Financial Subordinated (ITXEU). From a wide mark of 250bps early December last year, ITXEU closed tonight at 197bps, which is the tightest level of series 26. The most recent leg tighter was driven by UK banks. They benefitted from the good set of results from Sanatnder UK, but investors are also worried about the shrinking pool of obligations which will be deliverable into CDS contracts beyond 2023 (for instance RBS has none and Standard Chartered has only £360mln).